A friend brought to my attention a new approach to operating Airbnb properties and like many in this hobby, I was attracted to the arbitrage opportunity.
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Rental Arbitrage
I’ve long liked the idea of acquiring real estate interests whether it’s for long-term rentals or Airbnb properties. My biggest barriers to entry were first, committing enough capital for down payments, and second, managing tenants. I knew I didn’t have the bandwidth for servicing properties – especially if I wasn’t located in the city where I was operating them (Pittsburgh isn’t a huge tourist market) and property management companies eat most of any cash flow from long-term leases raising the risk profile and reducing the benefit.
But a friend approached me with another concept, an Airbnb rental arbitrage business in which you don’t buy the homes but use rental properties instead. He passed along a book on the topic, How to Become Financially Independent on Airbnb (Without Owning Property) which he got for free but paid $10 in shipping.
Rather than buy properties outright, commit cash to a down payment, and manage it, the book outlines how signing a long-term rental and then using it for Airbnbs creates a short-term rental arbitrage opportunity. That process makes sense because, of course, it’s cheaper to rent an apartment or a house for 12 months rather than the revenue that could be generated over a nightly rate even after fees are taken out.
Forgetting about Pittsburgh, we have explored the concept of operating an Airbnb in Fort Myers, Florida. During “Season” generally November to March, Airbnb hosts can charge 300% of what they might the rest of the year. A property owner can more than pay the mortgage if they are willing to rent out their home for 2-3 months during the winter and can enjoy their residence the rest of the year. However, for those of us in the north – that’s the very time of year we would prefer to spend in the sunshine.
This vacation rental arbitrage concept solves that problem because even properties with the best occupancy rates will still have periods in which they go unrented which is perfect for someone like myself who can pop down for a week here and there without sacrificing the upside.
Asset Light Like Hyatt, Marriott, And Hilton
Looking throughout the hospitality industry, a short term rental arbitrage business model is exactly what Hyatt, Marriott, and Hilton do. They market the property for short term stays while the hotelier holds the mortgage. Hotel chains manage guest communications as I would, but luckily Airbnb handles finding the guests and the costs of doing so are fairly limited.
The most interesting part of this model as the book outlined, was the tremendous cash the author’s rental arbitrage properties threw off even in the first year. With just five properties, his earnings were $300,000 and while there was no ownership or appreciation of his assets, there also wasn’t any debt which is why the big chains like a cash-first approach.
Low Risk
Without expensing the capital to acquire the property and carry the mortgage for 20-30 years, it takes almost nothing to enter the market and very little commitment if it goes south. For us personally, starting a vacation rental business that allows us to occupy it when it’s not rented, and to start in a market we know well makes sense more so than buying the property.
Concerns
The examples in the book talk about how short term rental markets exist anywhere there’s a hotel. That said, the author started in New Orleans and that market naturally attracts short term visitors as does southwest Florida. For a recent trip to Omaha, Nebraska we looked for an Airbnb rental and found relatively few. My initial inclination is that a lack of consistent short term rental business is the culprit because if the model generates cash, there will be plenty of entrepreneurs jumping in the mix. So while I think the model is possible just about anywhere, I believe insulating yourself in particular locations with a high volume of short term visitors is the best idea.
Short term rental regulations in markets like New York City could have those who market their Airbnb running afoul of local laws. Imagine signing a lease only for your market to disallow your business model – especially if you have multiple leases. While the book doesn’t touch on the topic, I’d think eligible leases would also be limited to smaller property owners without lengthy agreements prohibiting subleasing.
Conclusion
Airbnb arbitrage is far more attractive to me than buying properties and carrying the debt load that accompanies it. I like that Airbnb brings the customers, handles the payments, even has included insurance in the event of property damages. The concept arrived to me from a friend that has had success doing it, the ultimate endorsement. I recommend the book, it’s a brief 52-pages and outlines the process. Whether I find the right opportunity remains to be seen, but the model seems to work and it’s a lot more attractive than buying the properties outright.
To do what you are proposing would almost always violate your lease, the HOA/condo association rules, and other regulations.
You could try to see how long you can get away with it before the hammer comes down, but it won’t be long in any place where people actually want to be. Especially in places like Florida, folks are on the lookout for this kind of thing and it won’t be allowed to persist long. Why does anyone care? Because having strangers coming and going on short stays changed the nature and vibe of a property. Many HOA’s/Condo associations provide owners with an allowance of one rental per year, hence why you can find long term leases in these places but not short ones.
You’ve been warned…
Exactly.
Terrible advice from the writer!
*eye roll*
“To do what you are proposing would almost always violate your lease,”
Well, sure, if you’re doing it behind the landlord’s back. I’ve done this tens and tens of times, and I
1 – Am always upfront with the landlord.
2 – Spell it out in a document we both sign.
“the HOA/condo association rules,”
I’ll give you a point on this. HOA/COA’s *can* be bad news. But, it all depends on the specific CC&R’s. Honestly, if there’s an HOA, I walk, simply because an HOA can change their mind any time.
“and other regulations.”
Omnious. But, just like I don’t believe in the boogeyman, all encompassing “regulations,” is too vague to hold water. Always do Due Diligence. Most (not all) municipal regulations simply want to know what’s going on in their area, just like States issue Driver’s Licenses to know who’s on their roads. Learn the rules, abide by the rules.
“You could try to see how long you can get away with it before the hammer comes down,”
This is very myopic. Nowhere in the blogger’s post is he advocating going outside of the rules. Did you know there are lenders that will actually issues loans for properties based on their projected STR-income? Banks are the least risky of all institutions, and if it’s as fragile as you are dismissive, these just simply wouldn’t exist.
“but it won’t be long in any place where people actually want to be.”
Yeah, that’s why places on Airbnb in Joshua Tree, Austin, Miami, don’t go for $1000+/night. Wait. I got that backwards.
“Especially in places like Florida, folks are on the lookout for this kind of thing and it won’t be allowed to persist long.”
Really? Methinks you might be a Florida resident x Scooby-Doo Villian wanting “those darn kids” and their new-fangled “Sharing Economy off your front lawn,” but, don’t take my word for it. Some Florida stats:
Miami – 20,856 Active STR Listings
West Palm Beach – 1,549 Active STR Listings
Sarasota – 16,356 Active STR Listings
Jacksonville – 9,855 Active STR Listings
Snap, let’s go inland:
Gainesville – 1,433 Active STR Listings
(Source: AirDNA)
Yeah, it looks like this fad is about to blow over, any day, now. You do realize Airbnb’s been a thing for 16 years and is publicly traded? VRBO’s been around even longer.
“Why does anyone care? Because having strangers coming and going on short stays changed the nature and vibe of a property.”
I would argue the average American doesn’t know more than 1-2 of their neighbors (which, is tragic), and even less about what’s “vibing” in their neighborhoods.
We take better care of our properties than our neighbors, because our business depends on it. We also pour back tens-of-thousands back into our communities in the form of taxes. Downright deplorable.
“Many HOA’s/Condo associations provide owners with an allowance of one rental per year, hence why you can find long term leases in these places but not short ones.”
Methinks you might be running for your local HOA board, any day now. “Many HOA’s…” are pretty terrible, on the whole. Instead of firing off on topics you… seem to need to research more, I’d look into how HOA’s mistreat their actual residents, as the horror stories are rife, thick, and not the exception. Unless of course, you’re already on a board, in which your CC&R’s probably are already serving you.
“You’ve been warned…”
By the pro HOA-guy? Done. I will continue to avoid HOA’s and continue to improve the neighborhoods I’m in and the lives of the neighbors (yes) and guests we serve.
I’ll take ideas I won’t let Kyle Stewart put in my brain for $100, Alex.
We lost him just over 3 years ago, and, still too fresh.
Interesting idea but as mentioned, any halfway intelligent owner would restrict STR on a long term lease. Furnishing a unit would require cash.
“Interesting idea but as mentioned, any halfway intelligent owner would restrict STR on a long term lease.”
Really? Because, we have owners who have actually gone out and bought new properties knowing we would rent them. I guess all that equity their building up on our dime puts them below 50% intelligence.
“Furnishing a unit would require cash.”
It does. And that cash gets paid back very quickly.
As someone who’s looked in-depth at both the tax and financial aspects of clients who are both professional real estate investors, and amateurs who fancy themselves armchair experts, my advice is simple. Unless you’re willing to invest the time and effort to really understand what you’re getting yourself into, don’t. The old adage about a fool and his money applies in real estate perhaps more than anywhere else.
There are several major risks you aren’t considering:
– As others noted, subletting almost certainly violates your lease agreement. It may also violate HOA covenants.
– It possibly violates the T&Cs of your renter’s insurance policy, and maybe even the underlying owner’s policy if not disclosed to the insurance company, assuming the insurer permits subleasing a residential unit at all.
– You’re responsible if a short-term tenant trashes the place, or if some teenagers decide to rent it as a party house and the cops get called for a fight (or worse, drug dealing or a shooting).
– As Heather notes, you’ll need potentially substantial cash to furnish the unit.
– You run into what I call the “teacher’s problem”, where you have to hope you clear enough in peak season to cover the rent for the entire year.
Just seems like a bad idea if you ask me, one that leaves someone potentially open to financial and legal liability far beyond a rent payment.
A wise observation – real estate is a business full stop where you play and price against those in it full time. Always keep that in mind and discount expectations and factor risks accordingly.
Well, hopefully you’ll be NiceMeosh by the time we’re done.
“Unless you’re willing to invest the time and effort to really understand what you’re getting yourself into, don’t.”
1000%. It’s an easy way to get burned and burned badly.
“– As others noted, subletting almost certainly violates your lease agreement.”
This is why we never do it without the Landlord’s knowledge and agreement, AND sign (with the landlord) a lease addendum stating our intent.
“– It may also violate HOA covenants.”
It might. That’s case-by-case. We avoid HOA’s as a general rule (but I have colleagues who are in STR-friendly HOA’s (they do exist).)
“– It possibly violates the T&Cs of your renter’s insurance policy, and maybe even the underlying owner’s policy if not disclosed to the insurance company, assuming the insurer permits subleasing a residential unit at all.”
It absolutely does violate your renter’s insurance (business exclusion). That’s why we get STR-specific insurance (State Farm even issues this), and name the Landlord as the beneficiary.
“– You’re responsible if a short-term tenant trashes the place,
If an STR guest (and they are guests, not tenants) trashes the place, we bill them for it (and make it hurt) and fix everything back or better than it was on their dime. Why? Because out of purely selfish interests—our business depends on it.
Remember that STR-policy I mentioned? $4million in coverage (damage and injury) every stay.
“or if some teenagers decide to rent it as a party house and the cops get called for a fight”
You control everyone that enters and exits your property. We don’t allow “teenagers” (who would? Well, HOA’s don’t (or can’t?) forbid them).
We have security cameras and other devices at every one of our properties, and I would argue we know more about what’s going on at our place than the bellcurve of Landlords and Residents. We see problems before they happen and cut them off.
“(or worse, drug dealing or a shooting).”
Yeah, because this never happens in an HOA.
Humans are going to human, and you frankly simply can’t control that. However, for some truly eye-open-contrast:
My parents live in a vanilla neighborhood (no STR’s), and a guy moved in 3 doors down that has been arrested so many times for drug-possession, drug-use, and drug-you-name-it. What can they do about it? Nothing. He’s their neighbor, and they’re just dreading the “next thing.”
What can we do about our guests? Everything about it.
“– As Heather notes, you’ll need potentially substantial cash to furnish the unit.”
All depends. I have colleagues that have done it literally for free driving all over town (OK, free minus gas) to pick up high-end Ashley and Pier One furniture people were giving away. We don’t do this, but we typically have all of our furniture paid back within 3-6 months. That’s some pretty good ROI.
“– You run into what I call the “teacher’s problem”, where you have to hope you clear enough in peak season to cover the rent for the entire year.”
“Hope” isn’t a business strategy. Running the numbers with actual projections, lays the foundation for one.
“Just seems like a bad idea if you ask me,”
I don’t think anyone did. I think you volunteered.
“one that leaves someone potentially open to financial and legal liability far beyond a rent payment.”
For someone who seems to been very keen on seeing and sensing risk, you don’t seem to know how to mitigate it in the new world for new opportunities.
“ pick up high-end Ashley and Pier One furniture”
High-end? This says a lot about the investors.
If you are the lessee who violates the no-sublease clause, then when the lessor sues you (successfully) for breach of your lease, that becomes a public record as a judgment against you, thus f-ing up your credit report for when you want to get another lease, or mortgage, or car, or credit card, or insurance. That amounts to 7 years of “bad luck” for following 3 months of bad advice!
What kills me is the number of people in the comments whose brains immediately go to the “yeah, we should pull this off by sneaking around behind owner’s backs! No, wait, that’s terrible!”
Or, you know, just do the opposite and be upfront, get permission, and get it in official writing. #problemsolved
Another example of driving rents and home prices up so that the average wage earner cannot afford to buy a home or rent long term housing. The American dream of owning a house has vanished for people in what has been called “the greatest country in the world.”
You’ll forgive me, but I think that has WAY more to do with Wall Street REIT’s buy up houses by the development than a few one-off’s here-and-there going onto STR marketplaces.
If no one can buy a house, who’s staying in Airbnb’s?
You are better off advocating Trump University degree for a commission. Oh! it was bankrupt and shut down before Trump’s inauguration. You need to promote a way to earn an honest living. You are seriously considering to sign a long rental leasing and list it on AirBNB for your six figure annual income? It is a serious fraud scheme. Who will pay for “wear and tear” or damages on the property? AirBNB will not pony up for such losses, despite their written offer of up to $1M reimbursement. People who do not work hard to earn a living, not necessarily work smart per se, but wish to earn a six figure income are considered, in my dictionary, a scammer / fraudster at best. VFTW condemned NYC for nearly shutting down AirBNB and denying homeowners to earn $$$ to pay their mortgage. Well, if you cannot afford the costs of home ownership, you must not be a home owner. You are not a
home owner until the house is free and clear because the lender legally owns it. I have no sympathy to those who lost their homes in 2008 because the whole country paid for their irresponsibility. Though it included bankers, realtors, home buyers and politicians. What benefits extended to those who did not lose their homes or receive government bailout? Shame on you for peddling such a fraud scheme. Not everything in life is about $$$? Or is it in today’s society. Do nothing and use other people’s money to earn six figure annual income with no responsibility and accountability. On second thought, why don’t you practice what you preach and see if you can write a post on this topic in the dungeon? Oh no, Matt will not acknowledge you from the hole on the ground and banish you from his forum.
And to take a step further – we don’t entirely own homes or property even when ‘free and clear’ of a mortgage. The entity that collects property tax has the right to seize it if those taxes aren’t paid.
We are all just renting from the government.
This business model isn’t new. It’s been tried with spectacular failures here in SF. This was pre pandemic too.
Where is this author been? This article is like 10 years past relevancy.
I don’t think this blogger really knows anything about the travel industry given how terrible this article hasn’t landed. Any FF these days know this model and the pit falls.
I should start my own blog….clearly I know a ton more than this author.
Pretty shocked to see this article on LLF.
Come on Kyle this blog is better than this.
And not disclosing the link is an affiliate link (affiliate_id in the URL)
You have a good reputation for your agency, this doesn’t improve it
@Greg – I think I was pretty clear that I am not sure about the topic entirely and that I have doubts and concerns but I found it interesting. We highlight things we find that are interesting in the travel space and it hadn’t occurred to me to rent apartments or homes for the sole purpose of Airbnb without owning the property. There’s a disclosure at the top of every post and there are plenty of things that we have affiliates for including the credit cards (that we don’t push but every reader on this site and both authors use every day), the travel agency I run, and believe it or not, even the ads on the site pay us something though almost nothing. In my Father’s Day post, there’s an Amazon link for the book I am reading from Nomadic Matt. But if you don’t want to read it, or you don’t want to buy it, or you don’t want to go through an affiliate link – don’t do it. We do our best to provide interesting, relevant information, but by all means, don’t feel compelled to click anything.
The comments here did not disappoint. Heartwarming to see that nearly everyone finds the author’s idea to be impractical and unworkable. And the author’s knowledge of the subject to be impressively lacking, insufficient to tame his fantasies.
My favorite lines were him not ‘having the bandwidth to service properties’ and how ‘we have explored the concept’ meaning this is all fantasy in the heads.
The real purpose of this advertorial is the junk book recommended in the second paragraph. If you pay $10 shipping for a “free” book you paid for the book doh. The author is either very foolish or assumes the readers are foolish.
The real arbitrage is charging people $10 to ship a book using the media mail rate
While you may think that “rental arbitrage” sounds fancy, is putting a rental unit on AirBnB is absolutely not arbitrage, and using it like this only makes you sound financially illiterate.
But congratulations, you have discovered the concept of “subletting”, which has been around since at least medieval times.
Here is a guy that is doing the same thing; he looks like a real scumbag. You can make headlines just like him:
https://www.msn.com/en-ie/travel/news/a-woman-rented-out-her-1-7m-la-home-then-her-tenant-left-the-country-and-turned-it-into-an-illegal-airbnb-report/ar-BB1mYJQ2
https://www-businessinsider-com.cdn.ampproject.org/v/s/www.businessinsider.com/tenant-renting-million-la-home-airbnb-cash-cow-lawsuit-report-2024-5?amp&_js_v=0.1&_gsa=1#webview=1&cap=swipe
Ah, yes. Using exceptions to paint the picture and FUD everyone away.
Headline: “Meth Lab blows up in quiet, normal, vanilla neighborhood” – Quick, everybody, move out of your neighborhoods, now!
To quote a classic:
“What you’ve just said is one of the most insanely idiotic things I have ever heard. At no point in your rambling, incoherent response were you even close to anything that could be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul.”
“Shampoo is better. I go on first and clean the hair.”
I operate an Airbnb and own my primary home. I’ve considered relocating and doing an LTR on my primary. I would NEVER allow STR’s or any other type of subletting on my primary by a lease holder. In Denver, as in many areas, you must also obtain a lodging license, live in your house full time and if not the owner of the property, you’d need their express written permission to get the license. No home owner wanting their property leased as a LTR would sign off on that renter operating it as an STR. If that were the case, I’D RENT IT AS AN STR MYSELF. This isn’t a sound, logical business model. It’s a blatant attempt at finding loopholes in the system and an all around skeezy ploy. The only way these are being operated is illegally / against the owners knowledge or will. Shame on this blog for spreading this out there for shady opportunists to exploit.
You all misunderstood the the real reason behind this post – there is a FREE book for which you only pay $10 S/H. There are two affiliate links in the post. All he wants is for you to buy the book, that’s it. Everyone knows that everything described in this post is a very bad idea – it’s quite obvious. But what is not a bad idea is making money buy promoting a book which describes all of this nonsense.
Contrary to many of the comments I read here, I’ve read this book and I run this exact business model and do so with great success. I’m located just outside of Niagara Falls Ontario and operate 3 Airbnb’s. Each Airbnb I do not own, I rent it. On average over a 12 month period taking into consideration high times and low times each property generates approximately $1,500/month Profit after expenses. Obviously with any business there are pros and cons. With a short term rental business you have to deal with multiple guests, cleaners, handymen etc. and sometimes yes, you get bad guests! However the good guests FAR outweigh the bad guests and any damages we ever did incur were covered by Airbnb’s insurance. The lesson we learned… Ask guests with no track record to put a deposit down. Worked like a charm! Read the book, don’t read the book… up to you… but at least research the business model before bad mouthing the the business.